STEng – BT

ST Engg shares unhit by bid to end deal

LDA notice to end $179m contract referred to lawyers

THE market yesterday shrugged off news that Louis Dreyfus Armateurs (LDA) has given notice to terminate a $179 million contract with the marine arm of Singapore Technologies Engineering (ST Engg).

ST Engg shares hit an intra-day high of $3.14 before closing at $3.13, one cent up from Friday’s closing.

On Saturday, ST Engg announced that ST Marine had received a notice of termination from LDA dated March 17 relating to a shipping contract for a roll-on/roll-off passenger ferry (Ropax).

The Ropax contract – which was inked in July 2007 – was for a price of about $179 million (inclusive of variable options).

According to ST Engg, in the notice served by LDA, it was ‘alleged that there is a delay in the delivery of the Ropax vessel’.

‘They further allege that even if the vessel is tendered for delivery there will be deficiency in the deadweight capacity of the Ropax vessel,’ said ST Engg.

The notice states that LDA is ‘fully prepared to continue to fulfil its obligations under the contract’ in the event that it is not entitled to terminate the contract. However, it added that LDA ‘will become entitled in due course to terminate the contract by reason of deficiency in the deadweight capacity’.

If the notice is valid, ST Marine will be required to refund milestone payments amounting to $129 million plus interest. LDA may also pursue claims in damages.

ST Marine has referred the matter to its legal advisers, ST Engg said, adding: ‘If liable for damages, ST Marine’s position is that under the terms of the contract, its total liabilities for damages are capped at 10 per cent of the contract price.’

ST Engg said that ‘the termination of the contract is not expected to have any material impact on the consolidated net tangible assets per share and earnings per share of ST Engineering for the current financial year’.

RBS analyst Gina Kim said in a research report: ‘Although the company is saying that they expect no material impact on the earnings per share, we believe the negative impact on sentiment may be significant.’

The investment house said that the accumulated milestone plus damages claims can amount to $150 million – which is equivalent to 24 per cent of estimated pre-tax profits in 2011. A UBS estimate put a ‘high’ estimate of the potential charges at 5.5 per cent of estimated net profit for 2011.

However, RBS and UBS have maintained their ‘buy’ and ‘neutral’ ratings respectively. ‘We believe that ST Engg’s dividend payout of 90 per cent is secure despite this turn of events,’ said UBS analyst Cheryl Lee.

RBS added that ‘the relatively good news is that the contract termination value is worth only 1.3 per cent of orderbook and 1.6 per cent of market cap’.

When contacted by BT, ST Engg spokeswoman Sharolyn Choy said she was unable to comment on the lawsuit as it was being reviewed by ST Marine’s lawyers, but confirmed that the lawsuit was a first for ST Marine.

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